SpiceJet's distress may help case for open offer exemption

But regulator likely to be careful in setting a precedent

The fund-infusion into budget airline SpiceJet reportedly also includes an application to the Securities and Exchange Board of India for exemption from open offer. An open offer is made when an acquirer buys more than a certain percentage stake in a company. The rules are designed to help minority shareholders exit companies in the case of such an acquisition.

In the case of SpiceJet, the requirement for open offer would make it more expensive for an investor who is willing to provide funds in exchange for a stake in the company. Investors are therefore requesting an exemption from the same, according to reports.

The regulator can consider a distress situation favourably when evaluating an application for an open offer exemption, according to experts.

"In situations of distress and if the condition of the company is indeed grave; then such factors could be considered if an application for exemption is made. This would apply if the attempt is fundamentally to rescue the company, and that an open offer would otherwise result in a much greater amount of cash being required to carry out such a rescue act," said Raja Lahiri, Partner, Grant Thornton.

"From the point of view of minority shareholders, one has to weigh their interest in any potential open offer against the emerging backdrop that their stake would otherwise be completely wiped out if the airline itself ceases to exist. An exemption would not be out of place here." said S.N. Ananthasubramanian, Former President, ICSI and a practising company secretary who also advises on governance matters.

 

An open offer would mean that the acquirer would have to offer to pick up an additional 26 per cent from other shareholders.

It has been reported that Ajay Singh and JP Morgan are likely to invest about Rs 600 crore in the first tranche for over 24% stake, later bringing in other investors for further growth capital.

However some say that the regulator would be careful about setting a precedent in such cases.

"SEBI can grant an exemption to the acquirer from making an open offer, post recording the reasons in writing and whilst prescribing any conditions it deems fit. However, from a practical perspective, the proposed acquirer will have to showcase exceptional circumstances warranting such an exemption," said Tejesh Chitlangi Partner IC Legal.

He added that in the case of SpiceJet, if the acquirer is able to showcase that he is not in a condition to buy the additional shares if an open offer were to be made and hence will not infuse money unless an exemption is granted, then SEBI may in the interest of investors evaluate whether the infusion of money is critical to the survival of the listed company.

"If SEBI arrives at such a conclusion, then probably may grant an exemption. Regulators are ultra careful in creating precedents like these so will be interesting to see the approach adopted by SEBI if such exemption request is made," said Chitlangi.